What happens when one of the world’s largest banks reports a multi-billion dollar loss? The stock shoots up, of course. This has been a regular occurrence for a number of financial firms in recent months as shareholders cling to hopes of an end to the financial crisis. But, their happy-clappy reaction to Citigroup Inc.’s $5 billion (Rs20,000 crore) loss for the first quarter is perhaps one of the more perplexing.
True, there may not be many more huge hits on mortgage-related assets—Citi has already written down the most toxic of its collaterized debt obligation (CDO) holdings to around a fifth of face value. And even after the dismal results, the bank has raised enough capital to have hit its target tier-one ratio three months early.
But, while the worst could well be over, there are enough problems to bedevil the bank for a year or more. Investors should be expecting some sizable restructuring charges as Citi sheds staff and rejigs business units. And boss Vikram Pandit and his lieutenants are still working on deleveraging the balance sheet, such as selling the $50 billion or so of structure investment vehicle assets taken on board at the end of last year, and on shedding whatever businesses they deem to be non-core.
What’s more, consumer credit woes outside of mortgages are only just beginning. Its $20 billion-odd portfolio of subprime car loans is feeling more pain, while delinquency rates in Citi’s US credit card business indicate rising losses are possible well into next year. The bank has set aside another $1.2 billion of reserves for these businesses, but that may not prove to be enough if the economy worsens.
It’s hardly as if any of this is squirreled away in Citi’s gargantuan financial statements—finance chief Gary Crittenden laid much of it out for investors on the earnings call. Of course, it could be a smart counterintuitive move to invest now when the top guys are being suitably cautious—after all, the best time to get out was when they were still upbeat last year. But, it’s going to be a while still before Pandit’s turnaround plans start reaping meaningful rewards.